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Emerging markets multinational enterprises

Emerging market multinational enterprises (EMME) is a key term being discussed by economists and analysts for the past decade. Emerging market multinationals are companies that have been considered rising stars showing up on lists such as S&P 100 and FT Global 500. Based on the Financial Times, “in just two years, from 2006 to 2008, the number of Brazilian, Chinese, Indian and Russian MNEs on the FT Global 500 more than quadrupled from 15 to 62, in September 2010 there were 80. (Lexicon)”

Until a few years ago, multinationals from developed countries were shaping the market we live in, creating opportunities, making acquisitions, expanding and making foreign direct investments in developing markets. The global market was dominated by multinationals from developed economies. These experienced multinationals were investing in FDI’s and were in fact also contributing their knowledge and sharing their experiences with the small-medium enterprises (SME) in emerging economies. Recently, this context has changed with the rise of companies from rapidly developing economies. From what SME’s have learned from these multinational companies and with the contribution of external forces, such as governments, low labor costs, and several others, they have become global key players.

Multinationals in rapidly developing economies (RDEs):

Rapidly developing economies, such as the BRICS, have been shaping the global market in several ways. Companies from developing countries have been growing at an increasing rate for the past decades, expanding from their home countries to international markets, becoming large employers, main investors and strong competitors, hence changing the international landscape, making it a globally challenging environment.

As previously mentioned, multinationals from first world countries have been attracted to third world or developing countries. These multinationals have been interested to invest in developing countries for several reasons; mainly economic liberalization, low cost resources, access to new customers, and to develop their portfolios.

When talking about economic liberalization, third world countries’ governments, such as India and China, were interested in gaining exposure to the international market and wanted multinationals to invest in their countries. So these countries lowered the restrictions and regulations through decreasing corporate and business taxes, reducing barriers to entry and trade. Knowing that countries such as India and China had the world’s largest workforce, multinationals on the other hand wanted access to more low cost resources, which were available in these countries, in order to strengthen their global competitiveness through being cost efficient. In addition to that, these markets were opportunities since they had the largest population size. Since multinationals wanted to increase their market shares, these emerging markets were targeted since they had the world’s largest population size. Multinationals were broadening their portfolios through these investments, increasing market shares, and becoming cost efficient competitors.

Rise of Emerging Market Multinational Enterprises:

“Today the developing world accounts for 49 percent of the global GDP, up from 39 percent in 1990, and is likely to surpass the developed world with the next two decades.”

The emerging economies grew based on the fact they produced and exported low-cost goods to developed countries. Based on the article, “(Accenture, 2007), Rise of the Multi-polar World”, three drivers contributed to the rise of emerging economies:

Technology:

Technology has re-dimensioned our world to a small village through the introduction of the Internet and innovation of technology. Technology has broken the barriers of time and distance making it simple and possible for multinationals to deal with emerging economies. On the other hand, it has given emerging economies the opportunity to communicate and gain exposure to the developed world.

Economic Openness:

The rise of the multipolar world and interdependence was highly contributed by the breaking of trade barriers through the regional and international agreements such as WTO, NAFTA and ASEAN. With the shift towards economic liberalization, governments have adapted and integrated their policies towards these agreements, reducing trade tariffs and restrictions, allowing multinationals to export and invest in FDI’s in their countries, leading to more economic growth. One of the most significant agreements and impacts was the joining of China the World Trade Organization.

Expansion Strategies by Multinationals:

“By 2004 the world’s hundred largest multinationals had US$4.7 trillion in foreign assets (53 percent of total assets, up from 34 percent in 1993), US$3.4 trillion in foreign sales (56 percent of total sales, up from 43 percent in 1993), and 7.4 million overseas employees (50 percent of the total, up from 44 percent in 1999) (Accenture, 2007)”. Seeking to expand their businesses and further acts as global competitive players, multinational enterprises have broadened their activities to the emerging economies. Having plenty of raw materials, low labor costs and capital, emerging economies were attractive virgin markets for multinationals. Developing countries became major hubs for foreign investments. Foreign enterprises were penetrating developing countries’ economies and markets.

Global Interdependence:

As previously mentioned, rapidly developing economies known as RDE’s, which include countries such as China, South, Korea and Mexico, have been taking part in the international market context, expanding their businesses and penetrating developing and developed countries. In the following text, examples of multinationals from RDE’s, known as Emerging Market Multinational Enterprises, will be given to show how they are currently changing the global competitive market and seeking to dominate it.

China:

China has been known as the world’s largest factory. China has made a breakthrough by taking part in the World Trade Organization in 2006. Throughout history, it has been a communist country with closed boundaries, delaying it to innovate and take part in the international economy. But for the past two decades, the country has adapted to the global change and became a key player for outsourcing and a hub for FDI’s by multinationals. Having low labor cost, China has been a competitive cost-leader specialized in the manufacturing and production industry. Many multinationals from various countries have outsourced their productions from China.

For the past few years, China has been losing grounds with its cost competitive advantage. Many other emerging countries are competing with the Chinese market on the cost leadership grounds. Due to the rise of labor costs, Chinese multinationals have been facing a lot of competition from their emerging market counterparts such as Vietnam and India, were labor costs are still maintained at low stagnant levels. In addition to that, Chinese companies are being faced with major competition from the service sector from developed and developing economies; such as American and Indian multinationals, respectively. (BCG, 2012)

Due to the large domestic market, companies have been dependent on the local market rather focusing on the international market. “Real GDP growth in 2012 is likely to settle close to 8 percent, the smallest increase since 1991 (BCG, 2012).” Rather than focusing on the international aspect, today they are facing issues with having standardized products determined for the domestic market. In order to grow, they have to adapt to the international market needs. But in addition to that point, China has witnessed a high investments rate in the research and development sector. Based on a report from the Organization for Economic Cooperation and Development, China was expected to spend $136bn in research and development in 2006, 20 percent more than the previous year, overtaking Japan in second place (Dyer, 2006). One reason for this increase in investments on research is due to the rise of the middle class. Companies need to adapt to their consumers’ tastes and preferences. Another reason for investing in research is in order to compete with westerners on qualitative basis rather than only cost basis, maximizing their opportunities in the global market.

Within the past decade, China has realized a significant increase in its outward FDI’s, mergers and acquisitions. EMME, or emerging market multinational enterprises, are either expanding to foreign markets in order to bring back knowledge and resources home in order to compete domestically, or to seek for expansion and growth in the international market.

Lenovo is one example of a Chinese multinational, partly government owned, that has fought to be recognized as a global brand. With the fact that “non-branded companies typically earn gross margins of 3-8% and are constantly at risk of being undercut by cheaper rivals. Branded firms enjoy fatter margins (15% or more) and more loyal customers” (Schumpeter, 2012)7. With the fact that Chinese markets were perceived as providers of low cost/price products, Lenovo has faced a challenge in being accepted as a trusted high-end PC maker. They dealt with this issue by competing, learning and dominating the domestic market. At first they focused on selling to corporate customers, learning and establishing a name in this segment and then moving on to the consumer market. But understanding the market was not enough, it would still face issues in being accepted as a high end PC maker in the international market. In order to solve this issue, the company which was named “Legend”, was then changed to “Lenovo” in order to sound less Chinese and then continued with acquiring a leading American multinational. Lenovo was one of the outstanding Chinese multinationals that were able to change their image to a high end PC maker through acquiring IBM’s personal computer division in 2005 for $1.75 billion. Today, Lenovo is the second largest PC maker after Hewlett-Packard Inc., and the largest exporter of personal computers.

Lenovo has proved to be a fierce competitor in its domestic and international market as it is responding to the market need through developing new products. Recently it has expanded its product range introducing smartphone and tablets. “According to IDC, Lenovo was the second largest smartphone vendor in China behind Samsung Electronics and the world’s fourth largest smartphone vendor as of the second quarter (Hille, 2013)”.

South Korea:

Considering the fact that South Korea is part of the ASEAN, Korea’s domestic market is relatively small for companies to grow in. When referring to South Korea, we focus on a specific term with defining its rapidly developing economy, Chaebol. Based on the Lexicon Financial Times definition, “Chaebol is a family-run conglomerate in South Korea. Such groups have been at the heart of the heart of its rapid industrial development over many years, and tower almost every are of business: from stockbroking to theme parks; from supermarkets to heavy weapons.” Top worldwide known chaebols include Samsung Electronics, LG Electronics, and Hyundai, to name a few, control the South Korean economy. For the past decades, these family owned firms have significantly contributed to their countries economy. As proposed by (Rugman, 1981, 1996), South Korean firms seek to expand internationally in order to contribute to its “firm’s-specific advantages (FSA)” along with the help of the “country’s specific advantages (CSA)”. In order to maximize on its advantages, which may be technological, knowledge or management based, these family-owned businesses seek to expand internationally in order to learn and develop their business. These firms use benchmarks by gaining knowledge on the global aspect, learning from the international market and applying it back in their home countries, maximizing their potential of success and growth. The country’s specific advantages include government subsidies, protection from the international market and low cost skilled labor. Through a mix between the FSA’s and CSA’s, the network of these small family-owned businesses was able to penetrate the global markets and today listed on the world’s largest 500 companies.

Samsung Electronics is a global company categorized as an MNE and of the main leaders in the tech-industry. Samsung Electronics, which is known today for its smartphones and television products, has excelled in being recognized as a worldwide high-end brand. One of its main competitors in the smartphone industry, which will be discussed in this case, is Apple. Samsung has been competing on dominating the smartphone and tablet industry, which was first introduced by Apple in 2006. After pioneering the market with its release of the first smartphone, Iphone, Apple has been facing fierce competition from its rival Samsung. Samsung was second in the market after Apple, and has been emphasizing its R&D department since then. At first, Samsung was selling its product at lower price than the iphone, trying to take part of Apple’s market share. They have been sued for copying Apple’s products in 2011. But that did not stop Samsung from expanding its products range and increasing their prices to catch-up with the markets’ pioneer. Through their internationalization strategy and R&D, Samsung was able to reach higher sales, in units, for the past few years, exceeding Apple’s sales. “By the numbers, Samsung grew by 55 percent and shipped a record 88.4 million smartphones, which is 35 percent of the market share for the third quarter. By comparison, Apple grew by 26 percent and shipped 33.8 million iPhones. Apple’s market share slightly decreased from 16 percent during last year’s third quarter to 13 percent this quarter. (Kerr, 2013).” Samsung is competing in its industry with offering high quality products, decreasing their customers’ retention and increasing their annual sales. They have been introducing new successful products and pioneering the market. In fall 2013, they have been announced as pioneers of the curved smartphone with the introduction of the Samsung Galaxy Round. In addition to that, they have also introduced a new product, smart watch, that complements its products, smartphone and tablet range. Furthermore, Samsung has recently partnered with Google on project for developing new high-tech glasses. With its focus on innovation and research and development, Samsung will dominate this generation’s tech-industry, dictating the global evolution.

Mexico:

As other rapidly developing economies, Mexico was a closed economy by which the government imposed a lot of restrictions on foreign investments and trade policies. In the 1980’s, when the country faced an economic crisis, the government changed its policies, liberalizing its economy and allowing free-trade agreements with countries within and outside the American continent. That was a breakthrough for Mexico and Mexican companies. Since then, the country has witnessed inward and outward FDI’s and a flourishing rapidly developing economy. Many multinationals took advantage of the situation as the case with Cemex.

Emerging markets represent approximately 90% of the worldwide market today while western Europe and North America account for most of the remainder. (Lechtenberg, 2012)

CEMEX is the world’s seventh largest cement manufacturer based on “Global Cement Magazine, (Lechtenberg, 2012)” with operations in more than 50 countries. Cemex is a Mexican multinational company known for its constant acquisitions of global industry competitors. Throughout the history of the company, it has acquired domestic firms within the Mexican market and moving to the international aspect. Described by its executives as “the ring of grey gold”, the company seeks to continuously expand in the global market through mergers and acquisitions that would benefit the company and maximize its global operations, making it able to compete efficiently and effectively with key global players. “Today more than 55% of its operations are outside Mexico, two Spanish cement makers in 1992, and it has since moved into Asia, South and Central America and Egypt (The Economist, 2001).” Recently, Cemex has acquired Holcim’s assets in Czech Republic, this will help it to improve its portfolio in Europe, enabling it to function more efficiently especially in Czech Republic. One of the main reasons that contribute to Cemex’s acquisition strategy is to cut transportation cost. Cemex is also known for a term, “The Cemex Way”, where the company has internalized e-business within all the companies operations, ranging from production, sales, to mergers and acquisitions.Cemex is one example of an EMME that has pursued innovations and M&A to help it grow and expand in the international market.

Global Market Dictators:

Emerging market multinational enterprises rising from the rapidly developing economies have been changing the global competitive landscape. EMME’s have been moving up the value chain, improving their competitive position domestically and internationally as seen with the three companies mentioned earlier. For the past decades, we have seen companies and governments cooperating and collaborating together in order to improve their economic situation. With Lenovo, we have seen a Chinese company overcome the issues with being accepted and recognized as producers and manufacturers of high-end brands. We also saw emerging multinationals addressing and dictating the high-tech industry as is the case of Samsung. As with Cemex, we have seen how multinationals are dominating the field with pursuing mergers and acquisitions of international companies. These companies are no longer considered a side part of our markets that can be overseen; instead these companies will be addressing the future global competitive landscapes. We will no longer refer to the United States, Japan and EU as the triad; instead it is the rapidly developing economies that will be dominating the world’s economy.

As we have noted in the article, some emerging market multinationals are partly state-owned, and as a fact, in most of these governments, corruption levels are high. The questions is, to what extent will the governments take part in the decision making of the company and its strategic moves? Will governments impose restrictions on other countries through these companies, as is the case with the Russian Government and Gazprom? To what extent should we address transparency with these emerging multinationals?

Article written by Elias Chrabieh and Abdallah Antar

Bibliography:

United Nations Development Program. (2007). Human Development Report (HDR).